A trust structure helps to pass on one’s legacy and family wealth to successive generations without unduly burdening them.

Succession planning in these uncertain times has become more complex than ever. Wealthy families who are becoming more globally mobile, now have to deal with higher taxes internationally and increasing geopolitical and economic volatility. Families’ circumstances might also evolve, in response to ever-present volatility as well as across successive generations. As such, a family’s overall succession plans need to adapt to new circumstances, but yet protect and grow their assets for their loved ones sustainably and in a tax-efficient manner.

Use of trusts as an asset holding structure

A trust structure, coupled with insurance solutions, offer families a flexible and simple financial tool, which is adaptable to the family’s ever-changing circumstances. The patriarch or the matriarch (the Settlor) can consider contributing family assets to a trustee, who then holds such assets for the benefit of designated family members, under such terms as agreed between the trustee and the Settlor.

The Settlor may also document his wishes on how trust distributions to current and successive generations of family members are intended to be funded from trust assets and how they are intended to be structured. He or she can also share the family’s long-term philosophy and specify any charitable causes or specific charities that he may wish to benefit.

Trust terms can be tailored to meet the family’s need by allowing key members to retain some level of control and oversight over the trust. For example, one or more family members may be given investment powers and the consent of designated family member(s) may be required before significant decisions such as those relating to distributions from the trust are made. Where the family has established a family office, it is also possible for the family office to invest and manage the trust assets, which may include insurance income from policies held under the trust.

Trusts are favoured because they reduce the risk of individuals holding assets directly in his or her personal name, which may be subject to creditor and matrimonial claims.

Consolidating the family’s operating businesses under a trust also avoids fragmenting shareholdings in the family’s business amongst individual family members. This reduces the risk that individual shareholders may bring frivolous claims in relation to the family business and cause disruption to the businesses.

Assets that are held within a trust structure need not go through the probate process after a family member has contributed the assets to the trust. There is also additional privacy for family members where a professional trustee is appointed as the trustee will then be listed as the owner of the trust assets in public registers, instead of family members.

The trust structure and terms can be readily tweaked in response to changes in the family circumstances (i.e. key family members taking up residency in high-tax jurisdictions) or to mitigate geopolitical risk facing the family members or the trust assets.

Integrating insurance into a trust as a liquidity tool

With the right asset-holding structure in place, the question then turns to how best to generate liquidity sustainably to meet successive generations’ needs. Families could consider integrating life insurance into their succession planning toolbox.

Life insurance solutions can be tailored to provide both lifetime and post-lifetime liquidity. During the insured’s lifetime, income and savings plans can serve as alternative sources of liquidity despite short-term market volatility. By integrating such policies into a family trust, trustees can withdraw from the plans to fund distributions or even trustee fees without having to draw from the trust’s investment portfolio especially if the latter is experiencing a “bad” year.

Such policies may even be used as collateral to secure leverage for the trust’s investment portfolio. Upon the insured’s passing, the death benefit can also be paid to the trust for accumulation and reinvestment for future generations. As some policies allow for changes in the lives insured, such plans can be purchased for multigenerational wealth accumulation that last well beyond the patriarch/matriarch’s lifetimes.

For families with global investments, the spectre of a large inheritance/estate tax bill across multiple countries is a real issue. As insurers generally pay out the death benefit relatively speedily in a probate-free manner, life insurance solutions are commonly purchased to prepare for the funding of such taxes.

Where family wealth is primarily locked in illiquid assets (such as a family business), the liquidity provided by insurance solutions could be distributed to family members who otherwise may not be bequeathed ownership or control of the family business. This may help mitigate family disputes over the family business or perceived inequality in legacies.

As families look into long-term philanthropic partnerships, multi-year funding commitments rather than ad-hoc donations may become the norm. Life insurance could provide annual payouts that could then be donated in both good and bad years. Charities can also be designated as the death benefit beneficiaries for individuals who would like to bequeath a sizable amount upon their passing in a probate-free manner.

Succession planning is about putting in place plans that pass on one’s legacy and family wealth to successive generations without unduly burdening them. The inevitability of change means that the adaptability of a family’s asset-holding structure and liquidity sources ought to be central to any succession planning conversation. With this overarching goal in mind, families should therefore incorporate trusts and insurance solutions as two complementary and flexible tools into their wider succession planning framework.

This article was first published by The Business Times in May 2022.